Strategic Management Lecture 3

McGraw-Hill/Irwin © 2007 The McGraw-Hill Companies, Inc. All rights reserved.
4
Chapter Title
15/e PPT
Evaluating a
Company’s
Resources and
Competitive
Position
Strategic Management

4-2
1. How well is the company’s
present strategy working?
2. What are the company’s resource
strengths and weaknesses and its
external opportunities and threats?
3. Are the company’s prices and
costs competitive?
4. Is the company competitively stronger
or weaker than key rivals?
5. What strategic issues merit
front-burner managerial attention?
Company Situation Analysis:
The Key Questions

4-3
Fig. 4.1: Identifying the Components of
a Single-Business Company’s Strategy

4-4
Question 1: How Well is the Company’s
Present Strategy Working?
 Must begin by understanding what the strategy
is
 Identify competitive approach
 Low-cost leadership
 Differentiation
 Focus on a particular market niche
 Determine competitive scope
 Broad or narrow geographic market coverage?
 In how many stages of industry’s production/distribution chain
does the company operate?
 Examine recent strategic moves to improve its C.P.
 Identify functional strategies
Key ConsiderationsKey Considerations

4-5
 Qualitative assessment
–
Is the strategy well-
conceived?
 Covers all the bases?
 Internally consistent?
 Makes sense?
 Timely and in step with
marketplace?
 Quantitative
assessment – What are
the results?
 Is company achieving its
financial and strategic
objectives?
 Is company an above-
average industry
performer?
Approaches to Assess how Well
the Present Strategy is Working

4-6
Indicators of how Well a Company’s
Strategy is working
 Whether a firm’s sale is growing faster, slower, or about
the same pace as the market as a whole thus resulting in
a rising, eroding or stable market share
 Whether the company is acquiring new customers at an
attractive rate as well retaining existing customers
 Whether the firm’s profit margins are increasing or
decreasing; how well its margins compare to the same
trends for other companies in the industry
 Trends in net profits and return on investment and how
these compare to the same trends for other companies
in the industry

4-7
Indicators of how Well a Company’s
Strategy is Working
 Whether the company’s overall profits and market and
credit rating are improving or on the decline
 Whether the company can demonstrate continuous
improvements in such internal performance measures as
days of inventory, employee productivity, unit cost etc.
 How share holders view the company based on trends in
the company’s stock price and share holders value
 The firm’s image and reputation with its customers
 How well the company stacks up against rivals on
technology, product innovation, customer service,
product quality, delivery, time, price, getting new
products to market quickly, and other relevant factors on
which buyers base their choice of brands

4-8
 S W O TS W O T represents the first letters in
 SS trengths
 WW eaknesses
 OO pportunities
 TT hreats
 For a company’s strategy to be well-
conceived, it must be
 Matched to its resources/strengths and weaknesses
 Aimed at capturing its best market opportunities and
erecting defenses against external threats to its well-
being
S W
O T
Question 2: What Are the Company’s Strengths,
Weaknesses, Opportunities and Threats ?

4-9
 A strength is something a firm does well or an attribute
that enhances its competitiveness
 A skill, specialized expertise or
competitively important capabilities
 Skills in low cost operations,
 Technological expertise
 Defect free manufacturing
 Proven capabilities in developing and introducing innovative
products
 Cutting edge supply chain management capabilities
 Expertise in getting new products to the market quickly
 Expertise in providing good customer service
Resource strengths and competitive
capabilities are competitive assets!
Identifying Resource Strengths
and Competitive Capabilities

4-10
 Valuable physical assets
 State-of-the-art plants and equipments
 Attractive real estate locations
 World wide distribution facilities
 Ownership of valuable natural resource deposits
 Valuable human assets and intellectual
capital
 An experienced and capable workforce
 Cutting edge knowledge in technology or other important
business areas
 Proven managerial knowledge

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 Valuable organizational assets
 Proven quality control systems
 Propriety technology, key patents
 State-of-the-art systems for doing business via internet
 A strong network of distributors or retail dealers
 Sizeable amounts of cash or marketable securities
 A strong balance sheet
 Valuable intangible assets
 Powerful or well known brand name
 A reputation for technological leadership
 Strong buyer loyalty and goodwill

4-12
 An achievement or attribute that puts a company in a position
of market advantage
 Low overall cost relative to competitors
 Market share leadership
 A superior product
 A wider product line than rivals
 Wide geographic coverage
 Competitively valuable alliances or cooperative ventures
 Fruitful partnership with supplier that reduces cost and enhances
product quality and performance
 Joint ventures that provide access to valuable technologies,
specialized know-how and/or geographic markets

4-13
Competencies vs. Core Competencies vs.
Distinctive Competencies
 A competency is the product of organizational learning and
experience and represents real proficiency in performing an
internal activity
 Some competencies relate to specific skills and expertise
 They spring from proficiency in a single discipline or function and
may be performed in single department or unit e.g.
 Just in time inventory control
 Low cost manufacturing efficiency
• Other competencies are inherently multi-disciplinary and cross
functional
• They are a result of effective collaboration among people with
different expertise working in different departments e.g.
 Continuous product innovation comes from teaming the efforts of
people or groups with expertise in market research, R&D, design,
engineering, and market testing

4-14
 A core competency is a well-performed
internal activity central (not peripheral or incidental) to a
company’s competitiveness
and profitability
 A company may have more than one core
competency in its resource portfolio
 Rarely a company can legitimately claim more than
two or three core competencies
 More often a core competency is knowledge based
residing in people and in a company’s intellectual
capital and not in its assets on the balance sheet
 A core competency is likely to be grounded in cross-
department combination of knowledge and expertise
rather than being a product of a single department

4-15
 A distinctive competency is a competitively valuable
activity a company performs better than its rivals
 Signifies greater proficiency than a core competency
 The conceptual difference between a competency,
core competency, and a distinctive competency
draw attention to the fact that a company’s resource
strengths and competitive capabilities are not
always equal
 Core competencies are competitively more
important resource strengths than competencies
because they add power to the company’s strategy
and have a bigger positive impact on its market
position and profitability

4-16
 A distinctive competency is a competitively
potent resource strength for three reasons:
1. It gives a company competitively valuable
capability that is unmatched by rivals
2. It has a potential for being the cornerstone
of the company’s strategy
3. It can produce a competitive edge in the
market place since it represents a level of
proficiency that is superior to rivals

4-17
What is the Competitive Power of a
Resource Strength?
1. Is the resource strength hard to copy?
2. Is the resource strength durable – does
it have staying power?
3. Is the resource really competitively
superior?
4. Can the resource strength be trumped
by different resource strengths and
competitive capabilities of rivals?

4-18
Identifying Resource Weaknesses
and Competitive Deficiencies
 A weakness is something a firm lacks, does
poorly, or a condition placing it at a
disadvantage
 Resource weaknesses relate to
 Inferior or unproven skills,
expertise, or intellectual capital
 Lack of important physical,
organizational, or intangible assets
 Missing capabilities in key areasResource weaknesses and deficiencies
are competitive liabilities!

4-20
Prentice Hall, 2000 Chapter 4 20
Internal Factor Analysis Summary (IFAS)
Internal Factors Weight Rating
Weighted
Score Comments
1 2 3 4 5
1.00
Strengths
Weaknesses
Total Weighted Score
Notes: 1. List strengths and weaknesses (5–10 each) in column 1. 2. Weight each factor from 1.0 (Most Important) to 0.0 (Not Important) in Column 2
based on that factor’s probable impact on the company’s strategic position. The total weights must sum to 1.00. 3. Rate each factor from 5 (Outstanding)
to 1 (Poor) in Column 3 based on the company’s response to that factor. 4. Multiply each factor’s weight times its rating to obtain each factor’s
weighted score in Column 4. 5. Use Column 5 (comments) for rationale used for each factor. 6. Add the weighted scores to obtain the total weighted
score for the company in Column 4. This tells how well the company is responding to the strategic factors in its internal environment.
Source: T. L. Wheelen and J. D. Hunger, “External Strategic Factors Analysis Summary (EFAS).” Copyright © 1991 by Wheelen and Hunger Associates.
Reprinted by permission.

4-21
Identifying a Company’s
Market Opportunities
 Opportunities most relevant to a
company are those offering:
 Good match with its financial and
organizational resource capabilities
 Best prospects for profitable
long-term growth
 Potential for competitive advantage

4-22
Identifying External Threats
 Emergence of cheaper/better technologies
 Introduction of better products by rivals
 Entry of lower-cost foreign competitors
 Onerous regulations
 Rise in interest rates
 Potential of a hostile takeover
 Unfavorable demographic shifts
 Adverse shifts in foreign exchange rates
 Political upheaval in a country

4-24
External Factor Analysis Summary (EFAS)
External
Strategic Factors Weight Rating
Weighted
Score Comments
1 2 3 4 5
1.00
Opportunities
Threats
Total Weighted Score
Notes: 1. List opportunities and threats (5–10 each) in column 1. 2. Weight each factor from 1.0 (Most Important) to 0.0 (Not Important) in Column 2
based on that factor’s probable impact on the company’s strategic position. The total weights must sum to 1.00. 3. Rate each factor from 5 (Outstanding)
to 1 (Poor) in Column 3 based on the company’s response to that factor. 4. Multiply each factor’s weight times its rating to obtain each factor’s
weighted score in Column 4. 5. Use Column 5 (comments) for rationale used for each factor. 6. Add the weighted scores to obtain the total weighted
score for the company in Column 4. This tells how well the company is responding to the strategic factors in its external environment.
Source: T. L. Wheelen and J. D. Hunger, “External Strategic Factors Analysis Summary (EFAS).” Copyright © 1991 by Wheelen and Hunger Associates.
Reprinted by permission.

4-25
Fig. 4.2: The Three Steps of SWOT Analysis

4-26
SO Strategies
Generate strategies here
that use strengths to take
advantage of opportunities
ST Strategies
that use strengths to
avoid threats
WO Strategies
that take advantage of
opportunities by
overcoming weaknesses
WT Strategies
that minimize weaknesses
and avoid threats
INTERNAL
FACTORS
(IFAS)
EXTERNAL
FACTORS
(EFAS)
Strengths (S)
List 5 – 10 internal
strengths here
Weaknesses (W)
List 5 – 10 internal
weaknesses here
Opportunities (O)
List 5 – 10 external
opportunities here
Threats (T)
List 5 – 10 external
threats here
TOWS Matrix
5.4 TOWS Matrix (Fig. 5.2)
Source: Adapted from Long-Range Planning, April 1982, H. Weihrich, “The TOWS Matrix—A Tool for Situational Analysis”
p. 60. Copyright 1982, with kind permission from H. Weihrich and Elsevier Science Ltd. The Boulevard, Langford Lane,
Kidlington OX5 1GB, UK.

4-27
The Strategic Position and Action Evaluation
Matrix (SPACE)
 Select a set of variables to define Financial Strength (FS),
Competitive Advantage (CA), Environmental Stability (ES), and
Industry Strength (IS)
 Assign numerical value ranging from +1( worst) to +6 (best) to
reach variable that make up FS and IS dimension.
 Assign numerical value ranging from -1 ( best) to -6 ( worst) for ES
and CA
 Compute the average score for FS, IS, CA, and ES
 Plot the average for FS, IS, CA, and ES on the appropriate axis
 Add the two scores on the x axis and plot the resultant point on X.
Add the two scores on the y-axis and plot the resultant point on Y.
Plot the intersection of the new xy point
 Draw a directional vector from the origin of the SPACE Matrix
through the new intersection point. The vector reveals the type of
strategies recommended for the organization: aggressive,
competitive, defensive, or conservative

4-28
Y axis X axis
1. Financial Strength (FS
 Return on Investment
 Leverage
 Liquidity
 Working capital
 Cash Flow
 Ease of Exit
 Risk involved in business
1. Industry Strength ( IS)
 Growth Potential
 Profit potential
 Financial stability
 Technological Know-how
 Resource utilization
 Capital intensity
 Ease of entry
 Productivity, capacity utilization
2. Environmental Stability (ES)
Technological Changes
Rate of Inflation
Demand Variability
Price range of competitive products
Barriers to entry
Competitive pressure
Price elasticity of demand
2. Competitive Advantage (CA)
 Market Share
 Product Quality
 Product life cycle
 Customer loyalty
 Competition’s capacity utilization
 Technological know-how
 Control over suppliers and distributors

4-29
Hypothetical example of SPACE Matrix (Y axis)Hypothetical example of SPACE Matrix (Y axis)
Financial Strength (FS)Financial Strength (FS)
Return on Investment = + 6Return on Investment = + 6
Leverage = + 5Leverage = + 5
Liquidity = + 5Liquidity = + 5
Working capital = + 5Working capital = + 5
Cash Flow = + 4Cash Flow = + 4
Ease of exit = +1Ease of exit = +1
Risk Involved = + 4Risk Involved = + 4
Total Score = + 30Total Score = + 30
Average Score = 30/7 = 4.28Average Score = 30/7 = 4.28
Environmental Stability ( ES)Environmental Stability ( ES)
Technological change = - 4Technological change = - 4
Rate of Inflation = - 3Rate of Inflation = - 3
Demand variability = - 3Demand variability = - 3
Price range of competitivePrice range of competitive
products = -5products = -5
Barriers to entry = - 1Barriers to entry = - 1
Competitive pressure = - 4Competitive pressure = - 4
Price elasticity of demand = - 3Price elasticity of demand = - 3
Total score = -23Total score = -23
Average Score = -23/7= - 3.28Average Score = -23/7= - 3.28

4-30
SPACE Matrix Calculation X axisSPACE Matrix Calculation X axis
Industry Strength ( IS)Industry Strength ( IS)
Growth Potential = + 5Growth Potential = + 5
Profit Potential = +5Profit Potential = +5
Technological Know how = +Technological Know how = +
33
Resource utilization = +4Resource utilization = +4
Capital Requirement = +6Capital Requirement = +6
Ease of Entry = +6Ease of Entry = +6
Productivity, capacityProductivity, capacity
utilization = +4utilization = +4
Total Score = +31Total Score = +31
Competitive Advantage (CA)Competitive Advantage (CA)
Market Share = - 2Market Share = - 2
Product Quality = - 3Product Quality = - 3
Product life cycle = -2Product life cycle = -2
Customer Loyalty = -1Customer Loyalty = -1
Competition’s capacity utilization = -3Competition’s capacity utilization = -3
Technological Know how = -3Technological Know how = -3
Control over suppliers andControl over suppliers and
Distributors = -1Distributors = -1
Total Score = 15Total Score = 15
Average CA Score = - 2.14Average CA Score = - 2.14

4-31
SPACE Matrix CalculationsSPACE Matrix Calculations
ES Average Score = -3.28 + Average FS Score( + 4.28) = + 1ES Average Score = -3.28 + Average FS Score( + 4.28) = + 1
Average CA Score = -2.14 + Average IS Score ( 4.42) = + 2.28Average CA Score = -2.14 + Average IS Score ( 4.42) = + 2.28
CACA ISIS
FSFS
ESES
xx
xx

4-32
Examples of strategic profilesExamples of strategic profiles
Aggressive profilesAggressive profiles
Competitive ProfileCompetitive Profile
Defensive ProfileDefensive Profile
Conservative ProfileConservative Profile
Conservative profileConservative profile

4-33
 An aggressive profile suggests and Innovator Strategy; the
company is in a position to invest further and introduce new
market offerings; product development and market
development are real options here.
 A conservative profile is suggestive of an Analyzer Strategy;
the company will staunchly defend its domain while cautiously
looking for new opportunities of diversification
 A Competitive Profile may augur well for a flanker’s role, as
the company may not have the resource strengths to meet the
competitors head-on
 A Defensive Profile is self-explanatory where the company is
only looking to doggedly defend its domain and innovates only
on the periphery.
Interpreting the Profiles

4-34
 Assessing whether a firm’s costs are
competitive with those of rivals is a crucial
part of company situation analysis
 Key analytical tools
 Value chain analysis
 Benchmarking
Question 3: Are the Company’s
Prices and Costs Competitive?

4-35
 A company’s business consists of all activities
undertaken in designing, producing, marketing,
delivering, and supporting its product or service
 All these activities that a company performs internally
combine to form a value chain —so-called because the
underlying intent of a company’s activities is to do things
that ultimately create value for buyers
 The value chain contains two types of activities
 Primary activities (where most of
the value for customers is created)
 Support activities that facilitate
performance of the primary activities
Concept: Company Value Chain

4-36
Fig. 4.3: A Representative Company Value Chain

4-37
Value Chain Activities in Service Firms
 Wholesalers:
Primary Activities:
(a) merchandize selection and purchasing,
(b) Inbound shipping and warehousing
(c) outbound distribution to retailers
 Department Store Retailer
Primary Activities
(a) merchandize selection and buying
(b) store layout and product display
(c) advertising and customer service
 A Hotel Chain
Primary Activities
(a) site selection and construction
(b) reservations
(c) hotel operations
(d) managing lineup of hotel locations

4-38
Steps in Corporate Value Chain Analysis
1. Examine each product line’s value chain in terms of
various activities involved in producing that product or
service.
 Which activities can be considered core competency or
weakness
 Can any core competency be labeled as distinctive
competency
2. Examine the “linkages” within each product’s value chain
 Linkages are the connections between the way one value
activity is performed and the cost of performance of another
activity
3. Examine the potential synergies among the value chain of
different product lines/ businesses

4-39
Why Value Chains of Rival Companies
Often Differ?
 A company’s value chain depends on:
 the manner in which it performs its own business
and internal operations,
 its strategy, the approaches it is using to execute
this strategy,
 underlying economics of the activities themselves
• Because these activities differ from company to
company the value chain of rival companies differ
and thus their cost positions

4-40
Often Differ?
a. Competing companies may differ on the degree of
vertical integration
- Comparing the value chain of a fully integrated
and partially integrated rivals require adjusting the
differences in scope of activities
- The costs of internally performed activities for a
manufacturer will be greater than the cost of
internally performed activities of producers who
buy the needed parts and components from
outside suppliers and only perform assembly line
operations

4-41
Often Differ?
b. There is legitimate reason to expect that value chain and cost
differences between companies pursuing a low cost/ low price
strategy and a rival that is positioned on high end of the market
would be different
c. Cost and price differences among rival firms can have their
origin in activities performed by suppliers and distributors
or by distribution channel allies involved in getting these
product to end users
- Suppliers or wholesale dealers may have excessively high cost
or profit structures that jeopardize a company’s cost
competitiveness even though its cost for internally performed
activities are competitive

4-42
The Value Chain System for Entire
Industry Accurately assessing a company’s competitiveness in end use
markets require that managers must understand the entire value
chain system for delivering a product or service to end
users, not just company’s own value chain
 At the very least it means considering the value chain of
suppliers and forward channel allies
 Suppliers’ value chains are relevant because:
1. Suppliers perform activities and incur costs in creating and
delivering the purchased inputs used in company’s own value
chain
2. The costs, performance features and quality of these inputs
influence a company’s own cost and product differentiation
capabilities
 Any thing a company can do to help its suppliers take cost out
of their value chain activities or improve the quality and
performance of the item being supplied can enhance its own
competitiveness

4-43
The Value Chain System for Entire
Industry
 Forward channel and customer value chain are
relevant because:
1. The costs and margins of a company’s
distribution allies are part of the price paid by end
users
2. The activities that distribution allies perform affect
end users’ satisfaction
 For these reasons companies normally work
closely with forward channel allies to perform
these value chain activities in a mutually
beneficial way

4-44
Representative Value Chain for an Entire Industry

4-45
Developing Data to Measure a Company’s
Cost Competitiveness
 After identifying key value chain activities, the next step
involves determining costs of performing specific value
chain activities using activity-based costing
 Appropriate degree of disaggregation depends on
 Economics of activities
 Value of comparing narrowly defined
versus broadly defined activities
 Guideline – Develop separate cost
estimates for activities
 Having different economics
 Representing a significant or growing proportion of
costs

4-46
 Determining whether a company’s costs are in line with
those of rivals requires:
 Measuring how a company’s costs compare with
those of rivals activity-by-activity
 Requires having accounting data to measure cost
of each value chain activity
 Activity-based costing entails:
 Defining expense categories according
to specific activities performed and
 Assigning costs to the activity
responsible for creating the cost
Activity-Based Costing: A Key
Tool in Analyzing Costs

4-48
 Focuses on cross-company comparisons of how
certain activities are performed and what costs are
associated with these activities:
 Purchase of materials
 Payment of suppliers
 Management of inventories
 Getting new products to market
 Performance of quality control
 Filling and shipping of customer orders
 Training of employees
 Processing of payrolls
Benchmarking Costs of
Key Value Chain Activities

4-49
Strategic Options for Remedying a Cost
Disadvantage
 Company’s competitiveness on cost depends on
how efficiently it manages the value chain activities
relative to how well competitors manage theirs
 There are three main areas in a company’s value
chain where important differences in the cost of
competing firms can occur
1. A company’s own activity segment
2. Supplier’s part of the industry value chain
3. The forward channel portion of the industry chain

4-50
Remedying an Internal Cost Disadvantage
1. Implement the use of the best practices throughout the company
particularly for high cost activities
2. Try to eliminate cost-producing activities altogether by revamping the value
chain
- cutting out low value added activities
- bypassing the value chains and associated costs of distribution by
marketing directly to end users
3. Relocate high cost manufacturing activities to other geographic areas
4. Whether certain internally performed activities can be outsourced more
cheaply than they could be done in-house
5. Invest in productivity enhancing, cost saving technological improvements
6. Find ways to detour around the activities or items where costs are high
7. Redesign the product and/or some components to facilitate speedier and
more economical manufacture or assembly
8. Try to make up the internal cost disadvantage by reducing the costs in
supplier or forward channel portions of the industry value chain – usually
the last resort

4-51
Remedying a Supplier-Related Cost
Disadvantage
 Pressurizing suppliers for lower prices
 Switching to lower-priced substitute inputs
 Collaborating closely with suppliers to identify
mutual cost saving opportunities
 Just in time deliveries from supplier can lower:
- company’s inventory and logistic costs
- supplier can economize on their warehousing,
shipping, and production scheduling costs
 Companies may find it cheaper to integrate
backward

4-52
Remedying a Cost Disadvantage Associated with
Activities Performed by Forward Channel Allies
1. Pressurize dealer distributors and other
forward channel allies to reduce their costs
and markups
2. Work closely with forward channel allies to
identify win-win opportunities to reduce
costs
3. Change to a more economical distribution
strategy, including switching distribution
channels or integrating forward into
company-owned retail outlets

4-53
Fig. 4.5: Translating Company Performance of
Value Chain Activities into Competitive Advantage

4-54
 Overall competitive position involves
answering two questions:
 How does a company rank relative
to competitors on each important
factor that determines market success?
 Does a company have a net
competitive advantage or disadvantage
vis-à-vis major competitors?
Question 4: Is the Company Stronger
or Weaker than Key Rivals?

4-55
 Based on results of both industry and
competitive analysis and an evaluation of a
company’s competitiveness, what items
should be on a company’s “worry list”?
 Requires thinking strategically about
 Pluses and minuses in the industry
and competitive situation
 Company’s resource strengths and weaknesses
and attractiveness of its competitive positionA “good” strategy must address “what to do”
about each and every strategic issue!
Question 5: What Strategic Issues
Merit Managerial Attention?

Strategic Management Lecture 3

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